Courtesy IGI research..... Inflation; too many variables to push inflation higher The outgoing FY13 was benign in terms of concerns from inflationary pressures; however, FY14 won’t be the same as previous year. This is primarily on account of various taxation measures taken in Federal Budget FY14 which have pushed retail prices upwards across the board alongside gradual phase out of power subsidies and tariff rationalizations for both industrial and household consumers, which is likely to augment inflation. SPI readings of outgoing weeks revealed sharp increase in the prices of food commodities primarily due rising demands in Eid-ul-Azha period. This has resulted in significant increase in the prices of consumable kitchen items. Weak forex position yielded rapid PKR devaluation during the period under discussion coupled with low base will augment inflation during Oct’13. In lieu of rising inflationary pressures along with weak exchange rate valuations, the SBP is likely to inch up policy rate further by 150-200bps in remaining months of FY14, this will take policy rate to record at 11%-11.5% by FY14 end. However, we do not see a rate hike in upcoming monetary policy statement which is due in Nov’13 as headline inflation would be below policy rate till Nov’13. Pakistan’s foreign direct investment toppled from USD 5.4bn in FY08 to USD 1.4bn in FY13 primarily due to less supportive business environment. We expect that unless the new regime is able to resolve energy shortage crisis and improve law and order situation, it would be difficult to attract foreign investment into the domestic economy. The fiscal deficit for FY13 clocked in at 8.0% of GDP, highest since FY00, on the back of low revenue generation and excessive non-developmental expenditures. On the other hand, Federal expenditures witnessed a robust growth of 20.8% to PKR 3,577bn from target. Current and development expenditures surpassed by 13.5% and 51.9% respectively from initial budgeted estimates. In order to consolidate fiscal balance and comply with IMF guidelines, the government contours the following plan: 1. Strengthening tax-to-GDP ratio by over 1% of GDP 2. Curtailing expenditures mainly through eradication of untargeted subsidies 3. Rationalizing power and gas tariffs 4. Removing concessionary grants by various SROs 5. Improvising tax administration 6. Streamlining wage and salary cost of government institutions 7. Privatization of public sector entities We believe measures highlighted by current regime in order to consolidate fiscal account will face hiccups to implement however, resolution of fiscal slippages is need of the hour and it will take some time to bear fruits in the long run. IGI Research
Posted on: Fri, 25 Oct 2013 07:11:03 +0000
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